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Print view: Taxes in America:
A Long Rightward Lurch

FISCAL ANALYSIS:

Taxes in America:
A Long Rightward Lurch

by Gerald E. Scorse

Tuesday, 5 October 2010

The super rich get more than half of their income from capital gains—which are taxed at only 15 percent.

Nothing raises the blood pressure of Tea Partiers faster than taxes. “Taxed Enough Already,” their signs shout. “Taxed alive and again when we’re dead,” they say.

That’s the Tea Party view, and it’s on view nonstop. The facts, though, point the other way. We’re living in a Golden Age of low federal taxes, especially for eye-popping incomes. It’s a great time to be a billionaire in America, or even a measly millionaire.

Warren Buffett, a multi-billionaire, revealed in 2006 that his tax bill was “far, far less as a fraction of my income than the secretaries or the clerks or anyone else in my office.” The numbers shamed him: “There’s class warfare, all right,” he said, “but it’s my class, the rich class, that’s making war, and we’re winning.”

What makes the Tea Party wrong and Buffett right? Several provisions slant the U.S. Tax Code heavily in favor of heavy earners. Taxes may be the bane of the Tea Party, but they’re a relative boon for America’s have-mosts. Let’s look at some of the ways the Code keeps Warren Buffett’s fortune in Warren Buffet’s hands—and even chips in, redistributing income upward.

The major contributor is the 15 percent levy on long-term capital gains and corporate dividends. The top 1 percent of U.S.households owns nearly 40 percent of all privately-held stock. The super rich get more than half of their income from capital gains. The current 15 percent rate on gains is at its lowest since FDR’s first term. For middle-class Americans, the rate on wages is 25 percent. Taxing income from wealth at little more than half the rate of income from work: it’s the perfect way to make sure that Warren Buffett (and all the Buffett wannabes) pay effective tax rates nowhere near what their incomes might suggest.

“How can this by fair?” Buffett asked. “How can this be right?”

The Code also sets marginal rates, which were gutted by President Reagan. He whacked taxes in 1981 and again in 1986, taking the top rate all the way down from 70 percent to 28 percent. He also sent the federal deficit soaring, which modest tax hikes later repaired—until, of course, a double dose of tax-cut elixir from President Bush.

Whose bread do the Bush tax cuts really butter? Dick Cheney knows, and he’s laughing all the way to the bank. Cheney, famously declaring that “deficits don’t matter,” cast the tie-breaking Senate vote adding dividends to the tax-cut bonanza.

Taxes turn progressive when rates rise along with income. Fewer brackets mean less progressivity, and Reagan cut the number of brackets from 15 to four. There are six today.

Fewer tax brackets, coupled with a low threshold for the top bracket, give high incomes another edge. Taxes turn progressive when rates rise along with income. Fewer brackets mean less progressivity, and Reagan cut the number of brackets from 15 to four. There are six today, with the top four at 25, 28, 33 and 35 percent—a narrow spread, easily offset by provisions like the capital gains rate. The top rate kicks in at about $400,000 of taxable income, which author and tax expert David Cay Johnston calls “bizarre.” It’s a long way, he points out, from $400,000 to $1 million, $5 million, $100 million and hedge-fund billions: “Why don’t we have higher rates for those incomes?”

The top rate kicks in at about $400,000 of taxable income—and stays there, no matter how much more you earn.

Even the bottom marginal rates help top earners. A millionaire, filing singly, pays the same 10 percent on the first $8,375 of taxable income as the working poor—and so on, up the income scale. As the Center on Budget and Policy Priorities notes, the real winners from extending Bush’s middle-class tax cuts wouldn’t be middle class: “In fact, a family making more than $1 million will receive more than five times the tax cut benefit, in dollar terms, as a middle-class family making $50,000 to $75,000...” (Italics in original.)

The Tax Code doesn’t overtly discriminate, but it’s hardwired to make every tax break worth more at the top.

The Tax Code is also loaded with deductions that effectively rain dollars down on the rich. The Code doesn’t overtly discriminate, but it’s hardwired to make every tax break worth more at the top. All deductions get written off at 35 percent, starting with personal exemptions and standard deductions. This alone trims $7,315 off the tax bill of a post-65 couple. The serious money goes to itemizers, with Uncle Sam picking up five-figure amounts for mortgage interest on pricy real estate.

President Obama once proposed capping the mortgage deduction at 25 percent, the middle class rate. His idea quickly died, attacked as class warfare. This summer, in a piece titled “The Class War We Need,” conservative columnist Ross Douthat was incensed to learn that the owners of McMansions were defaulting at twice the usual rate. “The rich are different from you and me,” he wrote. “They know how to game the system.”

They also know that Congress always stands ready to tilt the tax laws their way. When the market crashed in 2008, lawmakers rushed to pass a one-year suspension of required distributions from retirement accounts. Only the haves stood to gain. Those who actually needed the distributions had to take them and pay taxes. The haves took a pass and saved thousands. Back to Douthat: “In case after case, Washington’s web of subsidies and tax breaks effectively takes money from the middle class and hands it out to speculators and have-mores.”

It’s taken a fortune in lobbying, but America’s tax laws are bearing golden fruit. As even a conservative can see, they’re redistributing income to the top.

Gerald E. Scorse, who writes from New York City helped pass a bill that tightens the rules for reporting capital gains.

Mr. Scorse's stories are republished in the Baltimore Chronicle with permission of the author.

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